The importance of financial literacy among young people is growing, as more adolescents have access to financial services, have their own bank accounts, make independent financial decisions, and are often in paid employment as well as school. More than ever, the ability of students to manage their finances is central to their immediate and future well-being. Furthermore, rising tuition costs, and the increasing burden of student debt, is a major issue in countries around the world. Earlier this year in Chile, an activist burnt student debt papers worth $500 million in protest of widespread student poverty. Financial literacy is therefore of key importance, not just at the individual level, in terms of enabling young people to avoid or minimise debt or to plan for a more financially-secure future, but also at the societal level.

Queen Maxima of the Netherlands
at the PISA launch

On Wednesday, the OECD launched Volume VI of the PISA 2012 results entitled “Students and Money: Financial Literacy Skills for the 21st Century.” This part of the PISA survey, the first ever cross-national evaluation of financial literacy among young people, involved 29,000 students from 18 countries. The 15 year-olds are asked questions with 5 different levels of questions, from recognising the purpose of an invoice (Level 1) to identifying which loan is the best offer.

Across the 18 countries, students show a wide range of financial skills and knowledge. Shanghai-China students had the strongest performance with a mean score of 603 points, while Colombian students averaged the lowest mean score of 379 points. A majority of the countries are in a tighter point span, ranging from 520 to 480, such as the United States (492 points) and France (486 points).

Distribution of differences in scores

However, even within countries students demonstrate varying levels of financial literacy. In New Zealand, the top 5% of students score around 700 score points, while the bottom 5% score around 300 points. This 400-point difference equates to about 10 years of schooling.

In addition to providing results on students’ financial literacy levels, the report also explores the relationships between financial literacy and other factors (including gender, rural vs. urban, immigration, mathematics performance, attitudes and socio-economic background). The relationship between socio-economic status and financial literacy comes across as especially important to acknowledge, as it shows a system’s ability to break vicious cycles of inequality and promote truly inclusive growth. In a successful system, students would obtain higher levels of financial literacy regardless of the parents’ level of education, income or wealth. Also, a system which does not rely on parents to transmit financial literacy has greater chances of reducing inequalities in household wealth in the long-term. Across the 13 participating OECD countries, financial literacy performance increases by 41 score points with every one-unit increase in the PISA index of socio-economic status (ESCS). This score gap represents the equivalent to about one extra year of schooling for students who have above-average family wealth and additional educational resources at home The difference between the students in the top quarter and bottom quarter of socio-economic index amounts to 91 score points (over two years of schooling). A students’ socio-economic status, therefore, explains a large proportion of the variation in financial literacy in OECD countries, more so than gender or immigrant background.

% variation explained by socio-economic status

Estonia appears to be the champion of breaking socio-economic boundaries in this field, with only a 53-point difference between the students in the top quarter and the bottom quarter of socio-economic status. It is the only country whose students overall have an above-average financial literacy performance, and that has a weak association between financial literacy performance and socio-economic status. It achieves high performance without leaving behind the disadvantaged students.

Parents’ life decisions also impact students’ financial know-how. Both parents’ occupation and their level of education are strongly related to students’ financial literacy performance in the OECD countries. The financial literacy performance of students with at least one parent with tertiary education differs by an average of 40 score points in comparison to those whose parents do not have a higher education degree. Again, that corresponds to one year of schooling. There is a large range among the countries’ average differences, from Israel’s 79-point difference to Italy’s 9-point difference. In all countries, the students with at least one parent in a skilled occupation, such as a manager or professional, have a higher financial literacy score than students whose parents work in semi-skilled or low-skilled occupations. The average difference in financial literacy performance between these student groups is 54 points. However, the variation among countries for parents’ occupation is not as stark as it is for parents’ education. Israel has a 75-point difference, while both Italy and the Russian Federation show the smallest differences with 34 points each. Overall, these results show that home-related factors do impact a student’s performance and financially literate parents could make a difference of a year of schooling. Fortunately, governments are already taking this important issue to heart, with over 50 countries implementing a national strategy for financial education, compared to 10 countries in 2008. The next assessment of students’ financial literacy will to be taken in 2015, allowing for the first comparison of change over time. Fingers-crossed for more good examples like Estonia by then!